Why is it important to know that tax is deducted under Section 194R?

Why is it important to know that tax is deducted under Section 194R?

According to Finance Act, of 2022 established Section 194R which involves the deduction of tax on perquisites or benefits linked with businesses or professions. The establishments, companies, or firms frequently expand various types of perquisites and benefits to their distribution partners, distributors, agents, or suppliers to inspire and excite them to help the further development of the business. There are a few examples that would involve but are not limited to, travel packages, gift cards or vouchers, products in incentive programs, or the utilization of business assets. This blog will discuss the deduction of tax at source as per Section 194R.

Objective of Section 194 R-

The objective of introducing the new section 194R is to prevent the possibility of tax evasion in business or profession. Many companies have invested in business promotion when they offer their distributors, stores, or distribution partners various gifts, benefits, perks, or good things (depending on the fulfillment of contractual terms or according to customary practices followed above years by a commercial entity) under section 37 of the 1961 Act.

For example, an electronics company offered LCD televisions as an incentive to channel partners who met a certain revenue target. The company includes these expenses in its profit and loss and income tax reports.

Those who receive it do not report it on their income taxes because the incentive is in kind, not in cash. This results in inaccurate reporting of financial information. Such profits must be recognized as income under the Income Tax Act 1961 (ITA).

Currently, according to section 194R, if a business gives its distributors or distribution partner cash or special shares, it will deduct TDS. If it is only a benefit in kind, the person providing the benefit or service has to pay TDS on the value of the benefit or service from his own bags.

The purpose of section 194R is to broaden the tax base and prevent possible tax evasion.

Scope of TDS Section 194 R 

As per Section 194 R, the TDS payable is 10% with effect from 1 July 2022. Only the resident (beneficiary) can get perquisite or benefits. Though, section 194R does not apply if the total value of the benefit or money paid in a financial year (FY) for an individual does not exceed Rs 20,000 for a single recipient.

Also, a Hindu Undivided Family (HUF) is not eligible for TDS deduction if the total income does not exceed Rs 1 crore in the case of business or Rs 50 lakh in the case of service during the financial year's first income.

Viability of circular-

A new section 194R was introduced in the Finance Bill 2022 for withholding tax at the source of profits or rights in relation to a business or activity. Later, CBDT issued a circular no. 12/2022 and 16.06.2022 to remove the problem. However, the directions issued u/s 194R are subject to the powers conferred by sections 194 R (2) and 194 R -(3) itself. These guidelines are also available for taxpayers. However, a few questions arise regarding enforcement and interpretation.

The apropos of section 194R to purely fiscal emoluments/benefits

TDS Section 194R (1) states that it is the duty of all persons to provide any benefit to the resident, whether converted or not in cash, arising out of the resident's business or activities, before making such contribution. income or gains, in the event, that such resident will be taxed if the withholding tax for such income or gains is ten percent of profits or a combination of perquisite or benefits.

The expression “any perquisite or benefits” would enfold both cash and kind benefits and allowances, but the expressions “either transferable into money or not” control the scope of the initial word “any perquisite or benefits” which means that the perquisite should be pecuniary. When fiscal perquisite or benefits were deliberated to be enfolded, the expressions “either or not transferable into money” were not needed.

Final words

There are several lawful matters in the circular provisioned and on the opposite, the concept that TDS doesn't claim the payment of expenditure is fixed here. On the ground of this, my one is proceedings the contrary view of the circular and not deducting TDS u/s 194R for recompense of expenses. Yet, a hostile stance may close up in a lawsuit, and all matters related to legal arguments may be set on in the ITAT or higher.

Additionally, recompense of expenses without hold-up documents should always be attached to the value of goods/services, and TDS as per relevant sections 194C/194J/194Q would be deducted.


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